Section 35 Higher Priced Mortgage Loan (HPML)

1 17/17/19 RFL Section 35 Higher Priced Mortgage Loan (HPML) Background In response to the real estate market troubles of 2008, legislative attitudes shifted sharply toward pro consumer lending protections. In 2009, a new era of regulatory requirements began, starting with MDIA s mandatory delayed closing period and continuing with the creation of a new category of mortgages: Higher Priced Mortgage Loans . HPMLs are deemed to be more expensive than a Mortgage with average terms, so a lender must facilitate responsible lending by not only ensuring the consumer has the ability to repay the loan, but must also: Obtain a full interior appraisal from a licensed or certified appraiser; Provide a second appraisal for free, if it is a flipped home; and In many instances, maintain an escrow account for at least five years.

2 Definition (a) HPMLs are consumer loans that possess all these characteristics: Secured by the borrower s PRINCIPAL Dwelling (any 1 4 unit structure used as a residence) Closed end (any type: including purchase, refi, or closed end home equity) APR exceeds the Average Prime Offer Rate (APOR) + margin, for a comparable transaction (as of the last date the rate is set / locked), by: o for a 1st lien o for a jumbo loan o for subordinate liens Rate spread calculator: spread Note: Small Creditors do NOT have a rate spread of their own. Under the ATR / QM rules of (b)(4), there is a threshold for Small Creditor Portfolio QMs, used in determining coverage for Higher Priced Covered Transactions (HPCTs).

3 This is unrelated to HPMLs. Evasion Prohibition (d) A creditor may not purposefully structure a loan as an open end credit (as defined in (a)(20)) to evade HPML requirements. Relationship to Section 43 ATR / QM underwriting When the Section 35 HPML category was initially created, ATR / QM rules did not yet exist. The requirement to determine a borrower s ability to repay was first introduced for HPMLs, but with the adoption of broader Section 43 ATR / QM rules in 2014, specific underwriting requirements for HPMLs became part of the overall ATR / QM rules for all consumer real estate loans.

4 However, other relationships between HPMLs and ATR/QM exist. In brief: Escrow exemption: ATR/QM covered transactions are used in part to determine escrow exemption qualifications for small creditors; Appraisal exemption: If an HPML is a QM (of any variety), it will enjoy an exemption from the HPML appraisal rules. 27/17/19 RFL Requirements There are no special disclosure requirements for HPMLs (other than a Right to Copy of Appraisal Notice, already required by Reg B and included on the LE). The only two requirements that must be considered for every HPML are: 1.

5 Escrow Requirements 2. Appraisal Requirements Each has its own criteria and exemptions, detailed below. 1. Escrow Requirement (b)(1) Unless exempted, a 1st lien, principal dwelling HPML must have an escrow account established prior to loan consummation for 5 years for the payment of property taxes and Mortgage related insurance premiums required by the creditor (ex: hazard insurance, default insurance, and/or flood insurance). Any insurance obtained voluntarily by the borrower, such as earthquake insurance or credit life insurance, is not included in this requirement.

6 Note: Principal dwelling includes structures classified as personal property under State law. For example, this includes a mobile / manufactured home, boat, or trailer used as the principal dwelling and taken as collateral. It also includes condominiums. Escrow Exemptions (b)(2) There are three kinds of HPML escrow exemptions: a. Transaction type; b. Limited exemption for condo property insurance; or c. Small Creditor Exemption for institutions without an escrow system Escrow Exemptions a. Transaction Type (b)(2)(i) No escrow account is required if the HPML is: Secured by shares in a cooperative; To finance the initial construction of a dwelling; A temporary / bridge loan with a term of 12 months or less; or A reverse Mortgage Note concerning construction/perm one time HPMLs: A construction period of 12 months or less is exempt from the escrow requirement.

7 However, the permanent financing of the loan WILL require an escrow account. The APR on a one time construction/perm transaction is calculated in accordance with (a)(1) and Appendix D and is then compared to the APOR for a transaction comparable to the permanent financing to determine if it is an HPML. Escrow Exemptions b. Limited Exemption for Certain Property Insurance (b)(2)(ii) Limited exemption for certain types of property insurance: No escrow account is required for insurance premiums on condos, planned unit developments, or other common interest communities which require participation in a governing association that maintains a master policy for all dwellings.

8 This exemption only applies to property insurance. Property taxes on such units must still be escrowed. 37/17/19 RFL Escrow Exemptions c. Small Creditor Without Ability to Escrow (b)(2) (iii) (v) This class of exemptions pertains to the creditor, and thereby exempts ALL HPML escrowing (rather than for any single transaction). This exemption has a four part test, and the creditor must meet ALL criteria: i. The creditor must be a rural / underserved lender. During the preceding calendar (or if the application was received before 4/1, during either of the two preceding calendar years), the creditor extended a first lien ATR/QM covered transaction on property located in either a rural or underserved county.

9 Compliance/guidance/rural and underserved counties list/ AND ii. The creditor must be a Small Creditor, by volume. During the preceding calendar year (or if the application was received before 4/1, during either of the two preceding calendar years), the creditor and its affiliated together extended no more than 2,000 first lien ATR / QM covered transactions . * AND iii. The creditor must be a Small Creditor, by asset size. As of the preceding 12/31 (or if the application was received before 4/1, either of the two preceding 12/31 dates), the creditor and its affiliates that regularly extended first lien ATR / QM covered transactions together, had total assets of less than $2B (adjusted annually).

10 * AND iv. Does not maintain escrow accounts. Neither the creditor nor an affiliate may maintain an escrow account unless it is for HPMLs dated 4/1/10 5/1/16, or post consummation escrowing for a distressed consumer to prevent default or foreclosure. If the institution escrows in any other way (even as an occasional accommodation or at borrower request), then it cannot claim this exemption, and must escrow current HPMLs. In writing this, the CFPB wanted to make sure the exemption was for those small creditors that do not have a system to administer escrowing as a regular business practice.